China: Two PMI Surveys Diverge

Econintersect:  The official PMI (Purchasing Managers’ Index) for China had a slight decline in January, down to 50.4 from a December reading of 50.6.  The export portion of the index came in at 48.5, down from 50, while the new orders portion of the index increased to 51.6 from 51.2 in December.  The numbers indicate that the strengthening manufacturing sector in China is driven by domestic demand.  The second PMI covering small and mid-sized, mostly privately owned companies, indicated strength in exports and a much stronger manufacturing sector overall.

An excerpt from Reuters summarizes the manufacturing activity distribution for the official report:

“It seems new orders for exports have declined even when new orders overall rose, suggesting that infrastructure spending and other investment to spur domestic demand is needed to keep (China’s) economy growing,” said Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory.

The results for the first two months of the year are usually distorted by the Chinese holiday season that peaks with the Chinese New Year celebration at the beginning of February.  Production is generally cut back and factory workers leave the industrial centers to celebrate in their traditional villages.  A comment from the Financial Times:

“The PMI is a quite inaccurate barometer around the Chinese New Year holiday,” said Lu Ting, an economist with Bank of America Merrill Lynch. “We believe the Chinese economy and its related asset markets will remain in a sweet spot in the near term.”

The second PMI reported by Markit and HSBC painted a stronger picture.  The January number for that index was 52.3, up from 51.5 in December.  The implication is that the larger and significantly SOE (state owned enterprises) businesses are giving one picture (slowing exports) which is not reflected by the smaller companies.  The report for the HSBC PMI specifically mentioned strengthened demand from clients in Europe and the US.

Note: Numbers above 50 indicate expansion while below 50 correspond to contraction.

For much of last year the HSBC PMI was in contraction while the official PMI stayed above 50 for all except two months.  Now the smaller companies are reflecting a stronger economy than are the large enterprises.  The latest HSBC number is the strongest in two years.  The key points from Markit:

• Output expands at the quickest pace since March 2011

• Solid rise in total new orders

• Purchasing activity increases at the fastest rate in two years

A comment provided in the Markit report on the HSBC PMI:

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“A higher reading of January final manufacturing PMI implies that China’s manufacturing activity is gaining further steam on the back of improving domestic conditions. We see increasing signals of a sustained growth recovery in the coming months: the steady investment growth led by infrastructure projects, the improving labour market conditions boosting consumer spending, and the ongoing re-stocking process to lift production growth.”

John Lounsbury

Sources:

• Asian shares retreat after China PMI, U.S. payrolls eyed (Chikako Mogi, Reuters, 31 January 2013)

• Growth in Chinese manufacturing slows (Simon Rabinovitch, Financial Times, 01 February 2013)

• HSBC China Manufacturing PMI (Markit, 01 February 2013)